The Fed cut and the market response

Markets took the latest Fed meeting in their stride, but the real drivers over the coming weeks will be data, politics and inflation risk.

We had the much-anticipated Fed meeting last night, and I was hoping it might set the trend for the market for the next three or four weeks over the Christmas period.

I don’t think it’s really been a trend-setter, but it certainly hasn’t been a trend-upsetter. On the back of it, both the equity market and the bond market have gone higher.

The worst expectations going into the meeting were that we’d get what everyone described as a “hawkish cut”. A cut that was fully priced in, followed by guidance that there wouldn’t be any more cuts from here. We didn’t get that.

The Fed is clearly divided on what should happen next.

Political pressure and a divided Fed

There are probably three influences at play. One is political. You’ve now got Stephen Miran on the board, along with Kevin Hassett coming on to replace Powell. We assume he’s the appointee to do that.

But we’ve got a new Fed governor joining the board on May 15, who we assume will be pushing for lower rates, along with Stephen Miran, at Trump’s behest. That creates political pressure for lower rates.

Powell also described this as a fairly unique situation, one the Fed hasn’t seen since the 1990s, and one he personally hasn’t dealt with before. He’s having to manage inflation risk on the upside, not helped by tariffs, while at the same time dealing with a weakening jobs market.

In other words, they should be cutting rates to help the jobs market, but raising rates to stop inflation pressure. Call it stagflation if you like. They’re caught in the middle, and the board is quite divided.

Inflation, jobs and why the meeting was read as dovish

The clear message from Powell was that inflation risk is likely to diminish because we’re getting further away from the tariff impact. By the second quarter of next year, he expects inflation to come off because those tariff effects will be more than a year old.

On the jobs side, Powell was actually quite optimistic about the economy as a whole. The inflation risk is diminishing, and the jobs risk is being managed through rate cuts.

That suggests there’s more room for rate cuts rather than no more rate cuts. Overall, the meeting was read as quite dovish.

Our market is up on the back of it. It’s not quite a trend-setter, but it has certainly endorsed the last couple of weeks of the market moving higher, and it’s being seen as a positive.

What could change the narrative

What could change this whole narrative are two things.

First, next week we get a dump of delayed CPI and jobs numbers in the US. Powell was very clear that the Fed is data-dependent, so they have to wait for that data. It could change the narrative in either direction.

The other risk is the tariff court case. If tariffs are ruled illegal, it could deliver a huge dose of uncertainty to the market. But paradoxically, it could also be seen as a significant positive, because it would mean less inflation risk. In that case, the Fed could get on with cutting rates again.

So we’ve got a few things that could drive markets over the next week with those data dumps. But all in all, we survived the Fed meeting. The market is going to have to find something else to worry about.